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Recognition of Service on Sale and Purchase of Businesses

Purchasing a business is not always a straight forward transaction, and often entails many considerations, including accounting and structuring advice, landlord consent and lease assignment, and many other conditions precedent that may be relevant case by case. 

After exchange of contracts, purchasers are usually required to contact the landlord, franchisor or other third party stakeholders to ensure that all agreements which make up the business are properly transferred in consideration for the purchase price payable.

Amidst the urgency of the transaction, certain aspects can be overlooked and most commonly the performance of transferring employees is not an issue which is closely examined, nor truly known, until after settlement. Employees are, however, more often than not, the most valuable part of any business.

Commonly, the employees’ entitlements are adjusted between the parties, but a query that often ensues is what action can be taken by a purchaser after taking over the business when an employee is not performing to expectation.  Can the purchaser terminate the employee’s employment, and, if so, how much of a notice period would be required. 

The answers to the above depend on whether the purchaser may elect to recognise service or is statutorily deemed to have recognised service that each particular employee has accrued under the prior owner.

Both the contract for sale and the Fair Work Act 2009 (Cth) govern this, and generally it would appear that recognition of service is deemed if the vendor and purchaser of a business are “associated entities”. Such association must be something more than succession of the business and could be, for example, that the vendor and purchaser are related entities (i.e. run or controlled by the same person(s)).

Where there is no association between the vendor and purchaser, a purchaser of the business may, if the contract for sale so allows, choose whether to recognise an employee’s service with the vendor, and for what purpose (e.g. employee entitlements, unfair dismissal, redundancy).

The terms and conditions of any sale contract will normally provide some stipulations as to whether the purchaser must offer employment to all or some of the existing employees in the business. The contract will also often deal with the recognition of service (and for what purposes), with the general position being that where there is a transfer of business, the purchaser will recognise the employees’ service.

Where the purchaser is granted the choice under the contract, a purchaser may commonly wish to not recognise service of the transferring employees. Reasons for doing so may include the purchaser’s wish to restart the employee’s minimum employment period or probation period and otherwise have the right to terminate an employee’s employment within the first 6 to 12 months of taking over the business, hence managing the risk of an unfair dismissal claim being brought by said employee.

The Fair Work Act 2009 (Cth) makes it incumbent on the purchaser, in such scenarios, to provide written notice to employees that the purchaser expressly does not recognise service before the new employment period begins. It is therefore crucial that this takes place prior to settlement of the purchase of business.

The above considerations are important ones in managing the undesirable risks of a possible employment law claim being made against a new purchaser of a business after significant consideration has been paid to acquire the business.   

If you are purchasing a business and need more information, please contact a member of the commercial law team at Long Saad Woodbridge.

Important Disclaimer: The content of this article is general in nature and for reference purposes only.  It does not constitute legal advice and should not be relied upon as such.  Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.



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